Financial Experts Examine Unsteady Stock Market

The country's stock market has been unsteady and unpredictable in recent weeks. The NewsHour talks to two financial experts about the market's uneven pattern and what it might mean for the American economy.

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JEFFREY BROWN:

At 9:30 this morning, the opening bell rang on Wall Street. Just minutes later, the Dow Jones Industrial Average had fallen more then 200 points. By day's end, after some gains and even more losses, it was down 387 points.

In fact, since last month, when the Dow hit 14,000 for the first time, the market's moves have been dramatic in both directions — but mostly downward — with triple-digit gains or losses on 10 different days. We begin with a look at what happened today with Gretchen Morgenson, a financial reporter and columnist for the New York Times.

Well, Gretchen, the problem today seemed to begin in France. Tell us what happened.

GRETCHEN MORGENSON, New York Times:

Well, we're starting to see the subprime mortgage problems that we've had in this country spread overseas. And in France, we had a very large bank — I think the largest — announce that three of its hedge funds could not let investors get out. They were stopping redemptions.

Then we had, of course, the European Central Bank infusing $130 billion, I think it was, into the system to try to ease some of the credit crunch that we are starting to see kind of ripple around the world.

JEFFREY BROWN:

The subprime mortgages, remind us what that means.

GRETCHEN MORGENSON:

These were mortgages that were made to people with risky credit, with sketchy credit, maybe perhaps not even a job or an income that they could verify. It was all fed by a demand for higher-yielding securities by investors around the world, insurance companies, pension funds, banks.

They all wanted to buy securities that could pay them a higher yield than, say, safer treasury bonds or, you know, high-yielding stocks. And so millions, billions of dollars was poured into mortgages that went to riskier credits, and now this is coming home to roost.

JEFFREY BROWN:

Now, the French bank statement referred to a, quote, "complete evaporation of liquidity in certain segments of the U.S. mortgage and securities markets." What does that mean, that liquidity problem?

GRETCHEN MORGENSON:

What that means is that mortgages are no longer being made to these kinds of people, and even higher up the credit scale to folks who do have a job, do have incomes that can be verified. Those people even are having trouble getting mortgages now.

There's a seizing of the credit markets because people are running away from risk. You know, five minutes ago, they were interested in taking as much risk as they can. Now, because everything's starting to seize up, they can't get out of these investments; they don't want anything to do with them.

JEFFREY BROWN:

There was talk of a clearing out of what you're talking about as excess risk. Is that a way to think of it?

GRETCHEN MORGENSON:

Absolutely. The problem partly, too, is that people don't know what they own. A lot of these subprime mortgages were rated very highly by the rating agencies, AA, AAA. And so now you're hearing about failures, defaults, delinquencies are rising, and you're saying, "Gosh, I thought I had a very high-rated security here." You don't know what you own, you run away from it.